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Switching From A Demo Account To A Live Account

Written By Osian Dance

It should be so easy… but the move from trading on a demo account to a live account, and the trouble it can cause, is a topic often discussed passionately over lunch, drinks and lectures at many a Pro-Trader and Mentorship Support Day at Trading College. The reason for these discussions? A common theme in the experience of most traders is that no matter how well they have done on their demo account they seem to initially experience worse trading results after they have moved to their live account. 

Let us begin by first clarifying for those of you who are new to trading exactly what we mean by the terms ‘demo account / trading’ and ‘live account / trading.’ Quite simply, demo trading (which is sometimes referred to as ‘paper trading’ or ‘forward testing’) is when you trade an account of virtual funds (the ‘demo account’) offered by the broker to simulate and mimic the real trading environment. Demo trading, therefore, offers a risk-free way to trade as you learn the Trading College strategies and hone your skills. ‘Live trading’ is the term used when the trader uses their own money to trade the live markets and the ‘live account’ is where this money is kept. Live accounts should only be used by traders who have tested their strategies thoroughly in a demo account and have proven that they are consistently profitable. 

In theory, the transition from demo to live account should be easy, right? After all, the only difference is that rather than using simulated virtual funds you use real money. So why do so many traders find this change difficult? To try and understand this better I would like to begin by telling you about my own experience of this change. 

My Story 

I began my journey at Trading College on the Pro-Trader Programme. After six months I found that I had a good understanding of the theory behind each of the strategies and had the confidence to trade them live but with no real success. No matter what I did I always found myself at the end of the week back at break even. Not making any big gains or big losses. I had too many questions and was missing the 1-to-1 attention that I had experienced when learning new skills in other parts of my life. And so, I decided to join the Mentorship Programme. 

The first week or two of my Mentorship was spent setting personal targets and goals with my coach whilst discussing the knowledge I had gained and issues I had faced so far. We created a plan for learning and decided that we would begin this journey by revisiting each strategy one at a time. For every strategy, we would discuss the parameters in the coaching session, and I would then go away and back test it. Once I was confident in my back tests, I would demo trade the strategy until my results were consistent, and then move to trade the strategy in my live account. 

And so, this is what I did. 

The first strategy we focussed on was the Level 1 & 2 Strategy. I went away from the session and back tested it diligently. As soon as I was confident in my back testing, I began to demo trade it. Things were going well. Within a couple of weeks, I was consistently achieving around 5% growth per week on the demo account with a 65-70% win rate. It seemed simple – follow the rules, manage your risk and watch the account grow. 

After proving I was consistent with the demo results, I decided to begin trading this strategy with my live account and, you guessed it, I began to lose money almost immediately. This was despite being convinced that I was doing exactly the same analysis and placing similar trades as I had been doing on the demo account. 

So, what had happened? 

The complexity of psychology, it became clear that not being able to make a consistent profit was a symptom of an underlying problem. I knew that I understood the practical theory behind the trading strategy as I was able to back test it and had proven this through success on the demo account. This meant that the underlying reason for this issue that I, and many other traders, face when moving from a demo to a live account must be psychological. 

As we all know money and finances are complicated subjects. And just as with all complex subjects our personal views and beliefs around them are influenced by a number of factors. In his book on the subject, Morgan Housel argues that relationships with money are largely influenced by our upbringing – children born into poverty are likely to grow up with completely different habits around money compared to children born into wealth. After this, our views are influenced by an infinite number of experiences we have later in life. All these events come together on the conscious and subconscious level to impact how we view and handle money – and for us, how we trade with money. Our personality profile can also have a big influence on our money management style. 

For some people losing £50 on a trade will not have any more a significant emotional effect than if they were swatting away a fly whilst placing the trade. Another person may be so daunted by the thought of losing £50 that they are unable to make themselves place a trade, to begin with. Despite wanting to treat a demo account as if it were actual currency being invested most of us, consciously or subconsciously, will not be able to get away from the fact that losing money on a demo account does not have any impact on our financial situation in the real world. In fact, it almost feels like a game. The problems occur when suddenly people transition to the live account where exactly the same analysis and actions have a real tangible influence on your actual hard-earned finances. We become influenced by the fear of losing. 

So, what can we do about this? There are no easy answers to the influences behind why we think and act the way we do as individuals around money. It can be useful to look inward and meditate on our own personal views and beliefs on the subject. From my own experiences of this transition from demo to live trading here are five lessons that I would like to share with you. 

Lesson 1 – Lean on your Trading College Community

You are not alone. This is a common issue that most successful traders have gone through at some point in their trading journey. Make the most of the community offered in Trading College and take reassurance from knowing that this is something of a psychological rite of passage. Chatting to other traders and the coaches can provide the support you need as well as a chance to learn some valuable lessons from other people’s experiences. 

Students on the Mentorship Programme also have their 1-to-1 sessions available to discuss this topic with your coach directly. They can help you create a tailored plan to work through it and better understand this issue. 

Lesson 2 – The Discipline Play

This is a term that will be familiar to many Trading College students who have attended Masterclass. 

For those who may not know this term taking ‘A Discipline Play’ is where you make a deliberate strategic decision to walk away from your screen after you have placed a trade. This could be to play golf, go for a run, get out in the garden, make a cup of tea… anything at all that doesn’t involve trading. 

Why would you do this? When trading live there is always a risk that dealing with real money can trigger us to overthink our decision which can lead us to fiddle with the trade. This could manifest itself in many different ways: from worrying about the trade when it goes negative and exiting early, feeling nervous about making a profit and so leaving the trade early as soon as it gets a couple of pips in profit or changing the stop loss or profit target levels. 

If you are certain of your strategy parameters, are confident in your analysis, and have ensured that your stop loss and profit target are in place then sometimes it is best to walk away from the trade and let it work itself out so that you don’t get in your own way. 

Lesson 3 – Position Sizing

If you find that you are unable to take ‘A Discipline Play’ and walk away from your trades and are constantly worrying about a trade when not at the screens then you should consider whether you are comfortable with the risk you are taking on the trade. 

Trading College encourages students to use a maximum risk of 1% of their total account value per trade. This does not mean that you have to use 1%. Our own life experiences mean that we all have different conscious and subconscious beliefs about money. For many traders seeing the monetary value of the 1% displayed on the screen as a potential loss can feel too daunting. Even though the trader knows that 1% of their account value is a sensible amount to risk there can still be a psychological barrier around this amount. 

For me, I only felt comfortable initially risking 0.5% of my total account value per trade. When using this percentage, it gave me the freedom to not think about the trade all the time and so gave me the space to build up my confidence in the probabilities. For other traders, it can be more useful to focus on the actual monetary value. I have spoken to a fellow Mentorship Programme student who despite having an opening account of £10,000 only initially felt comfortable risking £20 per trade (0.2% of the total account) until they had built up confidence. 

As your confidence increases you will know when you are ready to begin the process of increasing the risk per trade up to 1% of the total account value. 

Lesson 4 – The Importance of a Trading Log

A detailed Trading Log is one of the most important assets that a trader can have. As well as details of the date, time, strategy, stop loss, target and result it is just as important to create an area where you can note down how you felt on the day of trading and how you felt when placing an individual trade. 

It can also be extremely beneficial to create a section for hindsight analysis in your Trading Log. This means a section in the Trading Log where you revisit closed trades and double-check the details of the trade – was my analysis correct? Did I miss anything in my analysis? Did I enter in the correct place for the strategy I was using? 

As you take these notes you may notice over time: 

1) If there are any patterns between how you felt when placing a trade and the result. For example, you may notice that if you have not slept well or have had an argument with your partner it impacts your ability to make clear decisions, or it makes you more likely to fiddle and adjust trades when you shouldn’t. You may notice that you were worried about the position size you used when placing the trade or that you were not 100% confident that the setup was correct.

2) Analysing trades in hindsight can help you notice if you tend to make any mistakes in your analysis. You can then use this information to help refine your strategy and improve your trading techniques in the future. For example, perhaps in hindsight, you notice that for 4 out of 5 failed Level 1s last week you didn’t notice that there were also big 2-Waves setting up in the opposite direction on your signal timeframe. This meant that for these trades the probabilities were not in your favour and in future you may use this information to update your Trading Plan to test whether your results would improve if you do not take any Level 1s that also have opposing 2-Waves on the signal timeframe.

As you notice patterns in your behaviour and results you will begin to realise that there is a big difference in the relationship between a winning or losing trade that was based on a good decision or a bad decision. A good trading decision that resulted in a loss is still a good trade. As you notice any links between how you felt on your best days and worst days it may help you learn on the most important lessons in trading – when not to trade. 

Lesson 5 – You do not have to trade a live account if you do not feel ready

If trading were easy and all the problems we encounter as traders had quick fixes everyone would be doing it. Success in trading comes from perseverance during difficult times and developing the awareness to learn from these experiences to inform your future decisions. 

If you are finding difficulties with trading live there is absolutely no problem at all with paring things back, going back to basics for a while to rebuild your confidence and spending some time demo trading again. This is not a sign of failure. It is a positive sign of self-awareness and responsibility
for your learning. 

Revising your back testing will reaffirm your faith in the strategies, enable you to better think in probabilities, and refine your knowledge of the application of your chosen strategy.
Attending Bootcamp and Masterclasses will allow you to ask any questions you may have and it is always a good idea to rewatch any classes from the past that you have found useful. 

Conclusion
It is completely normal to face setbacks in your journey to trading success. It is these setbacks that allow us to come back again with even more knowledge and resilience in the future. Remember that trading is a unique job with unique psychological challenges. There are not many 

other jobs where you are required to lose some money in order to make money. Think about this and allow it to reassure you when you face these challenges. 

Occasionally you have to make some mistakes yourself in order to grow. In some situations, it does not work simply to have a more experienced colleagues tell you “Do not do this and you will be fine.” Most people have to hear this, take it into account, make the mistake themselves anyway, and work through it. This is why the Trading College community and coaches are here. To provide knowledge and help guide you through times like these. 

If you are ever in doubt, take a moment to remind yourself of the probabilities of trading. If you have analysed your bias and strategy set up correctly, are certain of your parameters, entered the trade at the correct level, and have a stop/target in place then over a series of trades you will have more winning than losing trades. Once you are truly able to think in probabilities you will feel comfortable leaving your trades to work themselves out and will find the psychological transition from demo to live trading much easier.